Sensex Opens on Flat Note; Metal Stocks Witness Selling Pressure

Wed, 14 Dec 09:30 am

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Asian markets are higher today. The stock markets in Hong Kong are up by 0.6% and Shanghai Composite is up by 0.1%. Stock markets in the US closed their previous session in the green.

Meanwhile, Indian share markets have opened the day on a flattish note. The BSE Sensex is trading lower by 37 points (down 0.1%) while the NSE Nifty is trading lower by 12 points (down 0.1%). The BSE Mid Cap index opened up by 0.1% and BSE Small Cap index too opened up by 0.3%. The rupee is trading at 67.46 to the US$.

Barring realty stocks, all sectoral indices have opened the day on a negative note with metal sector witnessing maximum selling pressure.

As per an article in the Economic Times, Indian consumers would have to pay more for fuel as global crude oil prices have shot up 15% in the last two weeks.

The consensus is that oil marketing companies may need to raise petrol and diesel prices by up to Rs 6 per litre when they review global fuel rates on December 15.

All of this is seen on the back of higher crude oil prices that are following an uptrend after the OPEC deal. Crude oil prices, which stood at around half the price of a bottled water during the start of this year, are setting forth for a turnaround. And going by the recent developments, there's a strong possibility of rise in crude oil prices ahead.

There are two factors in consideration that support this claim. First is the Organisation of Petroleum Exporting Countries (OPEC) deciding to reduce production by 1.2 million barrels per day starting January 2017. Second is the non-OPEC producers recently agreeing to reduce output by 558,000 barrels per day.

The above agreements are made in order to ease the global supply glut and bring in a revival in crude oil prices. And from what it seems, a revival is around the corner. If that happens to be the case, however, India would be at the losing end in the settlement.

Ever since June 2014, the Modi government has received a huge tailwind from falling crude prices. The fall in crude oil prices helped the government keep the fiscal deficit and inflation level in check. Also, the government captured most of the gain by raising excise duties on petroleum products multiple times. The petroleum subsidy fell from Rs 968.8 billion in 2012-2013 to Rs 300 billion in 2015-2016.

Crude Oil Extends Uptrend

With the rise in crude oil prices, the above trend could be reversing. Higher prices would mean a rise in the current account deficit and inflation levels. The situation has also been highlighted by the Reserve Bank of India (RBI). In its monetary policy statement last week, the RBI stated that crude oil prices may firm up in the coming months and could be a risk to the year-end inflation target.

So while India's oil-producing companies may benefit from the above development, the economy as a whole could witness some bumps in the ride ahead. As Kunal Thanvi wrote in one of the recent editions of The 5 Minute WrapUp... "We think prices at petrol pumps could rise. This will have a pass through effect on inflation. When consumer spending normalises post demonetisation, we should all be on our guard for rising inflation."

In the news from global financial markets, market participants are keeping an eye on the two-day Federal Open Market Committee (FOMC) policy review that is going to end today. The outcome of the meeting will be widely tracked as the Fed is likely to raise the interest rates. Moreover, bets are now also being placed on the timing of rate hikes next year.

In its last policy review, the central bank had signaled a possible rate hike in December as the economy picks up steam.

In our view, a rate hike in December by the Fed would have no less an impact on Indian financial markets than it would in the US. The hike, however small, will lead to a global change in the direction of interest rates. This could mean a pullback of cheap liquidity in emerging markets, including India.

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